The fact that the business environment in Serbia is bad is not a big news. Bad laws that prevent companies from working or impose high costs on them to meet various unnecessary conditions, and standard high corruption and clientelistic networks due to which companies are theoretically equal before the law, but in practice some are a little more equal than others, as well as other problems.
One of the consequences of a bad business environment is a low rate of economic growth. Most economists will tell you that there are no shortcuts to economic growth. Although there are numerous other problems (from the quality of the education system, the appreciation of the exchange rate, to the level of tax rates, etc.) the basic preconditions for rapid and sustainable economic growth are institutional: the rule of law. That the laws apply to everyone equally, “neither to the grandmother nor to the uncles” and to be applied effectively in practice.
Poor environment affects the structure of the economy
But in addition to the fact that a bad business environment reduces the possibility of the economy to develop, it also affects its structure. A bad business environment has a negative impact on all companies (except for the few privileged ones who can earn more in such an environment than in one where it would face normal competition), but micro and small companies are particularly sensitive to this impact. While large companies have significant resources (both material and human) that they can use to overcome these obstacles, small companies do not.
Large companies can also have political significance – if you employ a lot of workers you are an important political factor because your business can have an indirect impact on how people will vote. For example, if a company closes due to increased sales from imports, workers who lost their jobs because of that will be dissatisfied and there is a greater chance that they will blame politicians in power for that than the management of their company that failed to compete. Therefore, large companies have much more opportunities to have direct or indirect contact with senior government officials and to tell them what is bothering them, while these same officials have more incentives to solve these problems.
Companies from abroad have another advantage, and that is a direct connection with their embassy, which they can turn to if their vital interests are endangered. The embassy of that country can then use its diplomatic authority to protect the interests of the given company in the host country. And finally, the last instrument that makes large companies as a sector privileged is the subsidy program for investors – although it is officially open to all companies, in practice most of the funds go to large companies.
Micro and small companies feel the greatest consequences
The consequence of such a bad business environment as in Serbia is a change in the structure of the economy, so that the share of large companies in the economy has increased at the expense of small and micro companies. The first channel of influence is that there are fewer openings of new small businesses: high business risk leads to fewer people willing to start their own businesses, and banks are not ready to lend to such ventures because they fear they will not be able to collect their receivables in case these companies go bad. The second channel of influence is that micro and small enterprises in such an environment are much more difficult to develop and grow, and they are less likely to become medium or large enterprises.
Methodologically, micro enterprises are those that have up to nine employees; small with 10 – 49, medium with 50 – 249, and large with over 250 workers.
The disproportionate increase in employees in micro enterprises is clearly seen when you look at the percentage increase in employees. If we look at the number of employees in 2015 as an initial value, we see that the total growth of employment in the economy was 18%, but that the growth of employment in micro enterprises was significantly lower than that average.
This situation in the economy is not necessarily good or bad, it is an unintended consequence of a bad business environment in our country. If the situation were different, we would probably attend a stronger sector of micro and small enterprises, through a larger number of start-ups and their subsequent growth into medium and large enterprises, Talas reports.
